October 30, 2003
Emerging Markets Represent Underdeveloped Opportunities for SRI, Study Says
by William Baue
An International Finance Corporation report on socially responsible investing in emerging markets
finds obstacles and opportunities.
Although socially responsible investing (SRI) is predominantly practiced in developed countries,
the issue that galvanized the SRI movement emerged from a developing country: opposition to
apartheid in South Africa. The movement has solidified with $2.7 trillion in assets investing in
SRI worldwide. However, only a tiny portion, 0.1 percent or $2.7 billion, is invested in SRI in
emerging markets. So says a study that the International Finance Corporation (IFC), the private sector arm of the World Bank, released last week in
Tokyo at the United Nations Environment Programme Finance Initiatives (UNEP FI) Global Roundtable, Sustaining Value
The report, entitled Towards Sustainable and
Responsible Investment in Emerging Markets, describes the history and current landscape of SRI
investing in emerging markets. Authors Ricardo Bayón, Julie Cheng, and Marc de Sousa-Shields of
Mexico-based Enterprising Solutions Global
Consulting also project the future trajectory of SRI in emerging markets and make
recommendations on how best to guide this development.
“We do not see rapid,
‘organic’ growth of SRI in emerging markets over the short term,” the authors
write in the report. “In the medium and long term, however, growth prospects appear solid,
particularly among institutional investors (both in developed countries and emerging markets),
fueled by promising SRI fund performance, improving regulatory standards, growing demand for SRI,
and increasing acceptance by institutional investors of SRI as a financially worthy and even
One positive aspect of such reports is gleaning new insights on
historical developments. For example, as early as 1982, the State of Connecticut adopted the
Sullivan Principles, a code of conduct for companies doing business in South Africa drafted in 1976
by General Motors (ticker: GM) Board member Reverend Leon
Sullivan, the report reveals.
Now, South Africa is home to more SRI assets than any other
emerging market, with $228.2 million in 5 retail funds. This dwarfs the amount of SRI assets in
emerging markets held by developed country retail social investors, which totals only $39.7
million. The South African retail SRI equity funds also demonstrate the report’s point that
SRI can generate competitive returns. Over one and three years, these funds outperformed their
benchmarks, both the FTSE/Johannesburg Securities Exchange (JSE) free float index as well as the
MCSI World Index.
The report acknowledges the difficulty and imprecision of estimating the
opportunities that exist for SRI in emerging markets, though this does not prevent the authors from
hazarding a guess. According to a poll of US social investment professionals conducted by
Enterprising Solutions, the potential demand among US social investors for high-risk emerging
market investment could be as much as $4.5 billion. In a separate survey, the authors interviewed
12 US institutional and retail social investment professionals, who estimated the demand for all
emerging market asset types from their clients to be between $500 million and $700 million.
The report also points out the obstacles to emerging market investment for social investors,
some of which differ between those in developed countries and in emerging markets. One common
challenge is the lack of credible, standardized data on business practices related to social and
environmental issues. Again, South Africa represents an exception, as Sustainability, Research &
Intelligence (SR&I), a corporate social responsibility (CSR) data provider there, offers robust
research that will be used to constitute the new FTSE/JSE SRI Index that will be launched shortly.
This illustrates the report’s point that the practice of SRI often spurs the production of
reliable corporate social responsibility information.
Still, the report recommends
support for increasing and improving access to SRI corporate performance data to promote SRI in
“Given the great diversity among emerging markets, multiple
sources of corporate social and environmental data will be required to support greater SRI in
emerging markets,” the report states. “To increase creation of and access to sources
of such data, it is recommended that private sector emerging markets corporate social and
environmental performance data suppliers be supported.”
Other recommendations to
promote SRI investment in emerging markets include supporting global, national, and regional SRI
networks, motivating increased institutional and retail SRI investment, and harnessing the
IFC’s own resources in the direction of SRI.